Emissions trading: a zero sum game?

Individuals motivated by a desire to “do their bit” donate billions of dollars to charity each year. It is inconceivable that a government would introduce legislation that, while encouraging people to continue to contribute to charity, withdraws one dollar of funding for every dollar donated.

On the contrary, governments sometimes promote matching grants where they promise to match amounts equivalent to those already donated. Such an approach serves to motivate individuals in exactly the opposite way to the proposed CPRS.

This weakness in the CPRS can be overcome by establishing a causal link between the amount of emissions saved through voluntary action and the setting of the national target. If it can be shown that individuals or communities have made savings that are greater than would be expected through the introduction of a price signal alone, the number of pollution permits issued the following year could be reduced accordingly. We have termed this a “cap-and-slice” approach.

Without an effective way to incorporate the benefits of voluntary action, the CPRS will send a contradictory signal to Australian households and business. On the one hand, higher prices for energy and energy-intensive products will encourage reduced consumption; on the other hand, the absence of a causal link between behaviour and overall emissions will discourage co-operative contributions in the spirit of climate goodwill.

The cap-and-slice proposal allows policymakers to avoid an unnecessary choice between voluntary, co-operative action and exclusive reliance on a strict regulatory approach.